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Cameron to Eurozone

Drop dead

Dec 26, 2011, Vol. 17, No. 15 • By IRWIN M. STELZER
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There were three losers in all of this. First were those antinationalist, pro-European-unity advocates who predicted that the creation of the euro would bring the nation-states of Europe closer together, rather than become the divisive force it now is, with several countries likely to join Cameron in opposing this Franco-German effort to get around the provisions of the original EU treaty, to which they are signatories. Second were Italy and similarly situated countries who had hoped that the summit would reassure investors and bring down the interest rates the markets are demanding; it didn’t. Third was the United States, fearful of a new Lehman Brothers moment if the euro crashed. President Obama sent Treasury Secretary Timothy Geithner to advise the Europeans, who told him that a representative of a country with a higher deficit-to-GDP ratio than the eurozone as a whole should go home and solve his own problems.

As if these problems were not enough to make the summiteers look foolish, it turns out that Cameron’s refusal to go along, which forced the forging of a new arrangement outside of the EU treaty, makes the entire agreement of doubtful legality. The president of the German parliament says he doubts that the arrangement is legal, and Van Rompuy admits, “It will not be easy .  .  . legally speaking.” Indeed.

Little wonder that markets were unimpressed, and that interest rates demanded by investors for taking on Italian debt resumed their rise, and the euro its fall, dropping 2.6 percent in the two days following the summit to an 11-month low. Or that rating agencies are in the midst of downgrading the debt of France, which has not had a balanced budget in decades, and several other eurozone countries. 

We are watching two battles. The first is democracy vs. rule by elites. And democracy is losing. The Eurocrats, with Merkel and Sarkozy pulling the laboring oars, forced democratically elected governments to resign in favor of unelected technocrats in Italy and Greece. The Eurocracy demanded as a condition of continued bailouts that the elected Greek government be replaced by a coalition, undermining it and allowing the appointment of Lucas Papademos (economics Ph.D., MIT) to run the country. And the humiliation Sarkozy and Merkel heaped upon Silvio Berlusconi, Italy’s high-living prime minister, was the final blow to his political viability. He was replaced with another unelected economist-technocrat, Mario Monti (graduate work in economics, Yale), a serious loss to the tabloid press that happily chronicled Berlusconi “bunga bunga” parties. One can’t help having a soft spot for a man who describes himself as “pretty often faithful,” although that sort of thing undoubtedly does not amuse the rather straitlaced Frau Merkel any more than does Italy’s almost 120 percent debt-to-GDP ratio.

The second battle is a struggle between politicians and the markets. Over a year ago Merkel announced, “We must reestablish the primacy of politics over the markets.” As European politicians see it, they are in a battle with “speculators,” “hedge funds,” “profiteers,” and the like—known in other places as markets—for control of the tax and spending policies of their governments. They will lose, unless they are willing to accept ever-higher borrowing costs and ever-lower living standards for their aging, shrinking populations. 

Only a permanent transfer of German wealth and credit standing to Greece, Spain, Portugal, Italy, and any other countries that find themselves in difficulty can save the euro as it is now constituted. And even Angela Merkel, who has said that if the euro fails, Europe fails, doesn’t have the nerve to ask her voters to write so large a blank check.

So down the road the can was kicked once again. “More tests will obviously come, and soon,” said former German foreign minister Joschka Fischer. And J.P. Morgan Asset Management chief market strategist Rebecca Patterson adds, “The more you hear from the European leaders .  .  . the more skeptical you are.” Another can-kicking exercise is scheduled for March. Markets won’t wait that long to render a verdict on the most recent practice of that sport. Indeed, they have already rendered it.

Irwin M. Stelzer, a contributing editor to The Weekly Standard, is director of economic policy studies at the Hudson Institute and a columnist for the Sunday Times (London).

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